UK Financial Institutions: Reasons for optimism in 2023

There remains a threat of global recession in 2023, as economic output weakens in the face of rising interest rates and a persistently higher cost of living. While higher interest rates and market volatility can raise revenues for some financial businesses, reduced consumer and corporate activity can also create more challenging conditions for others.

However, Colin, Head of UK Financial Institutions at HSBC Commercial Banking, believes the outlook for the sector – which includes asset managers, wealth managers, insurance, fintechs and specialist financials as a whole remains positive for two reasons.

“The reasons why UK FIs thrive, despite the macroeconomic environment are because the UK is still a key hub for the global financial services industry, with both established businesses and start-ups growing and capitalising from the current market conditions. In addition, financial institutions have demonstrated in the last few years that they are able to be nimble and flexible – from their product offerings to the way they structure themselves and, in their ability, to deliver solutions for their customers,” he says.

One of the ways that financial services firms have improved on resilience and flexibility is significant digital investment, which has allowed them to seamlessly continue serving customers both during the pandemic and after.

Colin’s clients are able to leverage HSBC’s digital capabilities and channels to enable them to deliver value across their businesses and provide better client experiences. HSBC’s tools help, through its digital product offerings, APIs and connectivity to allow the bank to integrate more seamlessly with businesses to enhance their own products and capabilities.

Inflationary pressure and rising interest rates present challenges, but at this point, they are relatively known risks. There seems a likelihood that interest rates normalise at a higher level than the sector has known for the last fifteen years. But that’s balanced by the fact that in the last fifteen years, interest rates have been at record lows.

“There is a possibility that arrears and debt defaults across the corporate and consumer sectors could increase, but our clients are keeping a close eye on that and are aware those types of risks are there – so they’ve already built this into their analysis prior to this year,” Colin points out.

In the FinTech landscape, many companies didn’t even exist the last time that interest rates were this high, which has led some to speculate that 2023 could see some company failures. But Colin makes the point that despite wholesale funding costs increasing in a higher rate environment, this won’t necessarily mean that FinTechs will find things difficult.

FinTechs operate across a wide spectrum of the financial market. There are those serving high-net worth individuals, acting as asset managers or lenders, and Insurtechs covering a whole range of insurance services. It’s not easy to characterise them all under one heading. However, one thing they all have in common is that they are typically flexible and adaptable, which is often what made them disruptive in the first place.

HSBC is one of the few banks that can support clients from their early stages, through rapid growth and into maturity. For that reason, Colin has a clear overview of how a FinTech can move from start-up phase into an established business.

“FinTechs tend to do well in changing times,” says Colin. “They usually adapt quickly to the changing circumstances of customers and wider society, they’re able to find opportunities and they’re nimble both in their products and their route to market.”

Insurers are facing certain challenges the sector from the current environment. From a non-life-insurance perspective, the sharp increase in inflation can be challenging for underwriters trying to ensure they’re pricing policies accurately for future claims. They also need to be able to react quickly enough to changes in the market, including the rising costs of claims.

However, the disruption in the sector brought about by Insurtech challengers has seen the industry move towards a more digital approach that also allows for more flexibility. They are looking for new solutions and new business strategies that readdress the value they’re offering to customers and meet new requirements, such as climate-related and cybersecurity insurance.

“The insurance market today is a healthy and competitive market,” says Colin. “They’re already changing their ways of working and that puts them in a good position to meet the challenges of 2023 as well.”

Wealth managers are likely to see as many opportunities as there are pitfalls in 2023. Stock markets and the value of funds have been impacted by geopolitical uncertainty and rising interest rates and could be further hit if recession continues to threaten. But different asset classes will outperform at varying levels, and we are still seeing investment in businesses continue, which is positive,” says Colin.

Stock markets tend to anticipate economic recovery, particularly when given clear signals. Many market participants expect to see major central banks like the Federal Reserve, ECB and Bank of England start to wind up interest rate hikes this year and markets will likely respond to that signal. Another key indicator that FI’s will be watching in 2023 is the inflation peak, once economies can be sure that the peak has passed, that will give markets more confidence.

Regulation is, as always, a key strategic element for financial institutions. In the UK, the FCA’s Consumer Duty regulation will impact financial firms dealing with retail customers. Insurance firms are responding to the introduction of International Financial Reporting Standard 17 (IFRS 17), which is the new accounting standard for insurance contracts. And all firms will be carefully watching how regulators are increasing their focus on ESG standards and disclosure.

“When I think about what clients will be focused on as we go into the second half of the year, it’s looking for more certainty around economic conditions, the impact of regulation, and crucially the availability and accessibility of capital markets to ensure that they’re able to refinance and access additional capital,” says Colin.

HSBC offers a full range of products and services across the globe, and access to capital markets and expansion to new geographies are key to many of its partnerships with firms in the NBFI sector. Colin believes that clients will continue to react to changing circumstances, seizing opportunities in accessing capital for growth, and increasing flexibility through digital solutions.